Going with the liquidity flow

Markets 360, BNP Paribas Global Markets' strategy and economics division, examines the global outlook for Q4 2020.

Global growth divergence
Recent economic indicators and alternative data analysed by Markets 360’s Macro Quant team, such as mobility, point to a significant slowdown in GDP growth in Q4 2020, after Q3’s rebound.

Mobility plateauing globally
Sources: Google, BNP Paribas

The unprecedented policy loosening will continue to support economic activity, but headwinds persist. Activity is unlikely to return to pre-crisis levels for some quarters in most countries, and the recovery looks set to remain uneven across countries and sectors. Markets 360 expects China to outperform the rest of the world, for example, and within Europe, Germany to outperform Italy and Spain.

The focus is still on the effects of the Covid-19 shock on economic activity, but we will continue to keep a close eye on inflation trends. The shock is unusual as it affects both supply and demand, and so its impact on prices is inherently uncertain. In particular, it could encourage a number of structural shifts such as de-globalisation, which could fuel price pressures further down the road. However, Markets 360 views that the large amount of economic slack is likely to outweigh supply-induced upward pressure over the next 12 months.

Policy accommodation
As inflation is likely to remain below target in most countries, the Markets 360 team expects policy to be kept ultra-accommodative. Indeed, we have already seen a historical shift by the US Federal Reserve; the change in its long-run policy goal raises the bar to tighter monetary conditions, Markets 360 believes. Other central banks will also have to adapt.

Continued monetary policy accommodation will, in turn, create additional fiscal space, which is especially important for those countries with weaker balance sheets. However, governments may become increasingly selective on where the money goes, and keen to support the necessary reallocation of resources across the economy.

Liquidity buoys markets
The liquidity flows that result from looser policy have kept US real yields low and supported inflation expectations – the two variables that BNP Paribas MarFA™ (the Market Factor Analysis model) identifies as the main factors driving financial markets. The outlook for real yields and inflation expectations will remain an important driver of financial markets in Q4.

Uncertainty persists
While Covid-19 continues to dominate the headlines, it is important to also pay attention to other risks. US-China trade tensions that so rattled financial markets last year could intensify again in the run-up to the US presidential election. November could also see US ‘election day’ turn into ‘election weeks’, bringing more uncertainty as the amount of postal voting strains the US voting infrastructure.

US states by pandemic mail-in voting systems
Source: Reproduced with kind permission by Brookings Institution Governance Studies. ‘Voting by mail in a pandemic: A state-by-state scorecard’ by Elaine Kamarck, Yousef Ibreak, Amanda Powers and Chris Stewart (accessed 20 August 2020).

In the UK, Markets 360 views that the latest Brexit developments have increased the chance of an acrimonious break-up. While a no-deal outcome could still be avoided, things could look worse before they look better.

Acceleration on renewable energy development
On the all-important issue of climate change, the Markets 360 team highlights that cost-competitiveness is an increasingly important driver of growth in renewable energy, along with low interest rates and strong demand for green bonds. The team thinks that the transition to a low-carbon economy and renewable energy sources is likely to provide an important stimulus for investment. With 30% of the combined EU Next Generation fund and budget earmarked for green investment in Europe, Markets 360 expects renewable energy development to accelerate.

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